Editorial: Building Resilience
OPINION: The dairy sector has been told that it cannot afford to rest on its laurels.
Finance Minister Bill English told the DairyNZ Farmers Forum in Hamilton that Landcorp, a poor investment, was facing the same problem as other dairy farmers – low milk payout.
"It is dealing with a significant drop in earnings against a base of debt which will be a stretch to manage," English told 800 farmers.
"It's a low returning investment; we have a billion dollars tied up in that organisation and it pays taxpayers very little and in some years nothing, so it's a poor investment."
Landcorp is bracing for an $8 – $12 million loss this year, largely reflecting recent downward revisions to forecast milk payments.
Despite the loss, the Government is committed to retaining Landcorp, part of its $270 billion balance sheet.
English says in the past the Government was underequipped to understand the risks, but now has a "corporate treasurer" set of disciplines across the whole balance sheet.
"We now have a much more testing process for new investment, so Landcorp, for instance, will not get new capital. They wouldn't be able to put a proposal to meet our hurdle rate.... there aren't too many SOEs that can; it's all getting tighter.
"From here on Landcorp will be managed in normal farming style -- what you are used to."
And English warned that the Government won't hesitate to let go companies that come under financial pressure.
"The problem is that when an owner commits to keeping [a business] forever, it's difficult to crank performance out of it, so we have started the practice of letting go companies that come under financial pressure.
"When Learning Media and Solid Energy went broke we sold them; at the time we thought it may be controversial but it wasn't."
"So bankers, suppliers and managers of Government-owned agencies know if things go wrong they are out; that's the new policy."
English says Landcorp is adapting to the low milk payout in a similar way to everyone else.
"In the past Landcorp pushed itself pretty hard as a leading farming entity and invested fairly heavily to back that up; to be fair that's where a lot of dairy farmers went as well.
Now, when prices are down, Landcorp is adapting quickly; but in the end it is still a Government-owned entity."
English says previously SOEs felt no threat of going out of business because taxpayers would continue to fund them.
"Now they're under threat," he says.
